Bankruptcy Lawyers Lose Fee Dispute in SCOTUS

WASHINGTON (CN) – Attorneys for Asarco who successfully litigated a 20 percent enhancement fee failed Monday to eke millions more from the U.S. Supreme Court. It was the attorneys at Baker Botts and Jordan, Hyden, Womble, Culbreth & Holzer who are behind what many courts have called the most successful Chapter 11 in the history of the bankruptcy code, having brought Asarco back from the brink of financial ruin, and transformed it into a competitive company. The copper-mining and smelting firm had declared Chapter 11 bankruptcy in 2005, facing cash-flow and tax problems, as well as environmental liabilities. When it emerged from bankruptcy four years later, it had $1.4 billion in cash, and its environmental liabilities were successfully resolved. Asarco had still been mired in financial difficulties when its parent company, Grupo Mexico, had tried to merge Asarco and another subsidiary, Southern Copper Co. Asarco’s attorneys used that factor to win a judgment against Grupo Mexico valued at between $7 billion and $10 billion. This award was the largest fraudulent-transfer judgment in Chapter 11 history. Given their extremely successful work, Baker Botts and Jordan Hyden sought a 20 percent fee enhancement for the entire case, as well as fees for preparing and litigating their final-fee applications. A court soon awarded Baker Botts $113 million and Jordan Hyden $7 million for fees and expenses after a six-day trial. It approved a fee enhancement for the work performed on the Southern Copper Co. litigation, but not for the firm’s entire work for Asarco. This enhancement amounted to an addition $4.1 million for Baker Botts and $125,000 for Jordan Hyden. A federal judge in Dallas who affirmed noted that the attorneys here had obtained “a once in a lifetime result.” Baker Botts had hoped to recover the $5 million it spent fighting in court for its fee award but the 5th Circuit scoffed at approving such “perverse incentives.” “In the absence of explicit statutory guidance, requiring professionals to defend their fee applications as a cost of doing business is consistent with the reality of the bankruptcy process,” Judge Edith Jones wrote for a three-judge panel. Jones acknowledged that the decision could encourage unscrupulous firms to object to attorneys’ fee requests, putting the attorneys on the defensive and leading to a fee reduction. “This opinion should not be read as encouraging tactical or ill-supported objections to fee applications,” Jones said. “We are confident that bankruptcy courts, practicing vigilance and sound case management, can thwart punitive or excessively costly attacks on professional fee applications.” The Supreme Court affirmed that interpretation of “the American Rule – the rule that each side must pay its own attorney’s fees,” 6-3, Monday. “Because §330(a)(1) does not explicitly override the American Rule with respect to fee-defense litigation, it does not permit bankruptcy courts to award compensation for such litigation,” Justice Clarence Thomas wrote for the majority. Justices Antonin Scalia, Anthony Kennedy and Samuel Alito joined the ruling in full, as did Chief Justice John Roberts. Justice Sonia Sotomayor joined as to all but the last subsection of the lead opinion, which rejected a policy argument that Thomas called “flawed and irrelevant.” “In our legal system, no attorneys, regardless of whether they practice in bankruptcy, are entitled to receive fees for fee-defense litigation absent express statutory authorization,” Thomas wrote. “Requiring bankruptcy attorneys to pay for the defense of their fees thus will not result in any disparity between bankruptcy and nonbankruptcy lawyers.” Sotomayor called it improper to let “policy considerations to undermine the American Rule in this case.” Justices Ruth Bader Ginsburg and Elena Kagan meanwhile joined a dissent by Justice Stephen Breyer, who saw fee-defense work as part of the compensation for the underlying services in a bankruptcy proceeding. Rejecting the majority’s analogy of a car mechanic’s itemized bill, Breyer said “customers do not generally pay their mechanics for time spent preparing the bill.” “A mechanic’s bill is not a separate ‘service,’ but rather is a medium through which the mechanic conveys what he or she wants to be paid,” the dissent continues. “Similarly, a legal bill is not a ‘service’ rendered to a client. In fact, Asarco concedes that attorneys do not charge their clients for time spent preparing legal bills. A bill prepared by an attorney, or another bankruptcy professional, is not a ‘service’ to the bankruptcy estate.”